Who Really Benefits from Tax Cuts?

Headlines this week declared Canadians “saving” $30 billion as a result of changes to personal income tax and the GST since 2005.

This news was based on a Parliamentary Budget Office report with the rather dense title:Revenue and Distribution Analysis of Federal Tax Changes: 2005-2013. But here’s the thing: the annual loss of revenue due to tax cuts is actually closer to $43 billion if corporate tax cuts are counted, which the PBO report did not include. Any way you cut it that is a lot of money. The real question should be who benefited from these tax cuts?

Media reports cite the PBO’s conclusion that middle income earners got the most benefit as a percentage of their income. This is misleading. In absolute dollar amounts, the richest got a way more. The top 20 per cent of income earners got $10.9 billion, or 36 per cent of the total, while the bottom 20 per cent got $1.9 billion, or only six per cent. On a pocketbook level, the lowest 20 per cent of income earners have gained less than $500 in tax reductions, while the top 20 per cent have seen their taxes go down by almost $2,000 a year. The people who need it most got the least. And the people who need it least…. well you’ve heard that one before.

To be fair, several of the tax measures introduced since 2005 are progressive. For example the the top 20% of income earners accrue almost half of the financial benefit of the personal income tax rate reduction on the first $43,953 of taxable income from 16% to the 15% rate which was introduced in 2007. What have we got in exchange for those tax cuts besides a few more dollars in our pockets? The Conservative government claims that tax cuts spur consumer spending, investment and job creation. There's very little supporting evidence to back up this claim. While middle and lower income Canadians may spend their extra money, the rich tend to bank most of their savings, and they got the lion’s share. Tax cuts are one of the least effective ways to stimulate the economy. Corporate tax cuts are even worse bang for Canada’s buck than personal income tax cuts. Far more jobs would have been created if the government kept this money and invested it in infrastructure and public services. Tax cuts also end up costing individuals a lot in terms of loss of access to quality public services such as health care, higher university tuition and a longer wait before they can collect senior’s benefits. Then there is the lost opportunity cost of our government’s diminished capacity to be innovative about reducing poverty, tackling climate change, investing in infrastructure or improving the quality of health, education and other public services. What would you want the government to do if it had an additional $40 billion? A national child care program, a pharmacare plan, reducing university tuition to 2009 levels and an affordable housing strategy would all be quite affordable.

When seen in this larger context, the $43 billion a year in tax cuts don’t seem to be such a good news story, afterall.